The CERC (Deviation Settlement Mechanism and Related Matters) Regulations 2024 form the latest set of regulations governing the grid behaviour with effect from 16 September 2024. The present article analyses the impact of the 2024 Regulations on RE generators, especially in view of uncertainty in prediction of climatic conditions, and consequent impact on the power generation.

The evolution of the 2024 Regulations

The CERC, through its Regulations, seeks to enforce grid discipline among generators by imposing financial repercussions in case of over or under injection of power as compared to the scheduled power. These financial repercussions, though termed as “charges for deviations” under the regulations, have been understood by sectoral players as “penalties”. Despite well-known limitations in accurate planning and forecasting of RE generation, the regime of penalties to enforce grid discipline has been extended to the RE Generators as well.

In the past, under the 2014 Regulations the RE Generators were permitted a tolerance band of 15% deviation from the schedule. This meant that RE Generators would not be penalized if the deviation was within this range. Different penalty slabs were set out for deviation beyond 15%. A penalty of 30% was to be deducted from payment receivable for over-injection beyond 35%.

Subsequently, the 2022 Regulations reduced the tolerance bands for RE generators to 5% (for over-injection). Pertinently, in case of over-injection, deviation above 10% mandated zero payment. In case of under-injection, the tolerance band was set out at 10%, beyond which a penalty of 10% was payable (in addition to returning payment received for un-injected power).

Since the 2022 Regulations penalised the RE generators for factors beyond their control, these regulations were met with resistance and were challenged by RE associations before the Hon’ble Delhi High Court. The Hon’ble High Court directed that no coercive steps would be taken in terms of the 2022 Regulations.

Thereafter, in February 2023, the CERC made marginal relaxations to the 2022 Regulations by increasing the tolerance bands for RE Generators to 10% (for solar/hybrid) and 15% (for wind), thus differentiating between wind, solar and hybrid sources. However, the quantum of penalties continued to be greater than those imposed under the 2014 Regulations. Pertinently, the provision for zero payment continued to apply for over-injection beyond 15% (for solar/hybrid) and 20% (for wind).

While the Hon’ble Delhi High Court was seized of the challenge to the 2022 Regulations, the CERC has issued the 2024 Regulations. Under the 2024 Regulations, at present the tolerance band continues to remain the same as provided for in the February 2023 relaxation order. However, with effect from 01.04.2026, the tolerance bands would stand reduced to 5% (for solar/hybrid) and 10% (for wind). Further, there would be a significant increase in the penalties. For deviations beyond 10% (for solar/hybrid) and 15% (for wind), under-injection would be penalized at 200% of contract rate and over-injection would attract zero payment.

Issues and challenges in implementing the 2024 Regulations

While maintaining grid discipline is a desired objective, penalising RE Generators, that too to the extent as has been done under the 2024 Regulations, for factors which are admittedly not entirely in their control, may open the 2024 Regulations to a constitutional challenge. Penalties to the extent of 200% of the contract rate may be termed as excessive or disproportionate, which have been recognized as grounds for striking down a legislation as being arbitrary [2017 (9) SCC 1].

In addition, on repeated occasions, even as recent as in the Explanatory Memorandum of the 2024 Regulations, the inherent uncertainty and variability of RE generation and the infirm nature of RE sources has been acknowledged. The January 2024 CERC Expert Committee Report itself noted that endeavours were to be made to improve forecasting for wind and solar energy. This Report in fact suggested an increase in the tolerance bands, as compared to the tolerance bands provided under the February 2023 Order. However, by penalizing the RE Generators for deviation from permissible limits, the 2024 Regulations fail to factor this vital aspect of RE generation.

The unavailability of accurate forecasting measures may compel the RE Generators to challenge the 2024 Regulations on the basis that no law can compel a person to do the impossible. [(2023) 3 SCC 220]

Further, the 2024 Regulations may encourage the RE Generators to resort to gaming the system. This may be done by over-scheduling the power, where the RE generator would at least receive some payment for all power injected after accounting for the penalty. This would also ensure that generators are able to use maximum installed capacity based on actual availability of solar and wind resources rather than being forced to curtail generation based on a conservatively forecasted schedule and sit on excess capacity. This is as opposed to taking the risk of scheduling based on conservative forecasts, where the RE generators would be paid nothing for the power injected beyond the tolerance band. Even the 2024 CERC Expert Committee Report, acknowledged the fact that the existing regime of penalties continued to result in a tendency of RE Generators to over-schedule. The 2024 Regulations fail to address this mischief.

The 2024 Regulations also appear to be in conflict with the guidance contained in the National Electricity Policy 2005 and are therefore arguably contrary to the Electricity Act, 2003. The Policy calls for promotional measures for sustained growth of renewable energy sources and ensuring regulatory certainty. However, the regime of tolerance bands and penalties appear to have become continuously stringent since 2015, with at least three substantive revisions, without any evidence demonstrating improvement in forecasting of RE source data.

In addition, the tolerance bands themselves disclose insufficient correlation with the object and purpose of maintaining grid security. The 2024 Regulations create two classes of tolerance bands for RE generation: (i) tolerance bands applicable from 16.09.2024 to 31.03.2026, and (ii) tolerance bands applicable from 01.04.2026 onwards. Presumably, a substantial improvement in forecasting technologies within the next two years has been assumed. In any event, there appears to be no disclosed rationale for having two different sets of deviation bands.

While grid discipline is a must for ensuring grid security, such objective should be aimed to be achieved in a pragmatic manner. The commercial interest of the RE industry is equally a relevant consideration which ought to be given due importance. While RE Generators must continue to grapple with employing forecasting solutions that yield better results, the inherent uncertainty of RE resource availability may warrant further adjustments to ensure grid safety while encouraging RE investment.

This article was originally published in The Economic Times on 24 September 2024 Co-written by: Aashish Gupta, Partner; Puneeth Ganapathy, Principal Associate; Sankalp Udgata, Associate. Click here for original article

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